|
Private
consumption growth favoured by lower unemployment and higher real incomes
National
retail sales rose 3.7% in October over the same month the prior year, down
from 5.3% growth observed the prior month. However, according to the São
Paulo Retail Federation (Fecomercio, Federação do Comércio do Estado de
São Paulo) retail sales rose 4.1% in November compared to a
2.7% expansion the previous month. Furthermore, the joint survey of the
Fundação Getúlio Vargas (FGV) and Fecomercio indicates that
consumer confidence in São Paulo rose 8.3% in November over the
previous month, from 108.4 in October to 117.4, on a scale between 0 and
200, where 100 is the line between pessimism and optimism. The
deleterious effect of the sustained spike in interest rates on private
consumption throughout last year appears to have been offset by the
positive effects of declining unemployment and rising real incomes.
Healthy
investment growth sustained
The most
recent industrial production data indicate that investment growth
moderated in the final quarter of the year. In October, capital goods
output grew 2.1% over the same month the prior year, which was down
notably from the 6.9% expansion the prior month. Nevertheless, more
recent trade data indicate that capital goods import growth moderated but
remained strong through the end of the year. In the fourth quarter,
capital goods imports were up 21.1% over the same quarter the prior year,
which was down from the even more robust 32.5% growth pace in the third
quarter.
Exports
hit record high
In
December, the currency closed at 2.34 reais to the US$, which
represented a 13.4% appreciation in nominal terms versus the US$ compared
to the prior year. Nevertheless, healthy export growth persisted last
year, despite the fact that the exchange rate appreciation accelerated. In
the final quarter of last year, exports were up 20.6% over the same period
the previous year. The fourth quarter reading was down moderately from
the 22.5% year-on-year expansion registered in the third quarter but
continued the trend of virtually unabated double-digit growth observed
since September 2002. As a result, exports reached US$ 118.3 billion last
year, the highest level ever and up 22.6% from the prior year. Import
growth rose at a lesser but robust 10.6% in the fourth quarter of 2005,
down from the 18.7% growth in the previous quarter. As a result of the
final quarter expansion, imports reached US$ 73.5 billion in 2005 – up
17.1% from the prior year. Due to the robust export expansion last year,
the trade surplus widened from US$ 33.7 billion in 2004 to US$ 44.8
billion.
Economy
likely to move out of trough
According
to Consensus Forecast participants, economic growth is likely to have
picked up modestly in the final quarter of last year to a 1.9% annual
growth pace from 1.0% in the third quarter. As a result of the more
subdued second half growth in gross domestic product (GDP), annual growth
is likely to have reached just 2.5% in 2005 according to Consensus
Forecast participants, which is 0.3 percentage points below last month’s
estimate and also below the Central Bank’s 2.6% forecast (revised downward
on 28 December from 3.4%). Next year, monetary officials expect a rebound
in domestic demand amid declining interest rates. However, the current
Central Bank forecast of 4.0% growth is ahead of the Consensus Forecast
estimate of 3.3%, which has been lowered by 0.3 percentage points from
last month.
Consumer
prices moderate amid more subdued economy
The
mid-December consumer price index (IBGE-IPCA 15) that covers monthly price
increases up to the 15th of every month increased 0.38% over November.
The December reading was down from the 0.78% increase registered in the
preceding month. The combination of lower transportation costs and
declining food prices accounted for the subdued development of consumer
prices in December. As a result of the December consumer price increase,
the annual inflation rate dropped from 6.4% the prior month to 5.9%, which
is above the Consensus Forecast estimate of 5.6% for the full year and
also exceeds 5.1% Central Bank inflation target. Thus, inflation is
likely to have overshot the monetary policy inflation target for the fifth
consecutive year. Nevertheless, Central Bank officials continued with
monetary policy easing in December, lowering the benchmark SELIC interest
rate for the fourth consecutive month from 18.50% to 18.00%. This year,
Consensus Forecast participants expect inflation to moderate and to reach
4.6%, which is unchanged from last month and virtually in line with the
Central Bank’s 4.5% monetary policy target.
Government
pays off IMF debt
On 27
December, the finance ministry retired the entire US$ 15.5 billion in
outstanding debt due to the International Monetary Fund (IMF) under the
terms of the Stand-By Arrangement approved in September 2002. The
government claims that the prepayment will help save some US$ 900 million
in interest costs due through 2007. Furthermore, consistent trade and
current account surpluses as well as Central Bank market intervention to
stem the appreciation in the currency have helped bolster international
reserves significantly. The government reiterated its continued
commitment to continuity in the economic policy framework that has helped
successfully sustain international investor confidence. The retiring of
the IMF debt helps to further improve the external debt profile, which the
government has been able to restructure significantly in the past few
years amid more favourable conditions in international markets. The
government estimates that total external debt reached US$ 165 billion in
2005, which represents just 21% of GDP – the lowest level in 30 years. |
